Ethical Performance
inside intelligence for responsible business


breathing new life into ethical supply chain management

April 2005

Many CSR practitioners will have heard stories of supply chain auditors who visited a factory in a developing country only to discover that the underage workers they were looking for had slipped out the back.

Experience teaches that ethical supply chain monitoring alone is of only limited effectiveness in improving the lot of workers in factories making goods for western markets. Gap has put huge effort into monitoring its supply chain. But the retailer’s latest CSR report shows almost none of its factories comply with the retailer’s standards, and the company believes violations are more widespread than it has been able to verify. Other companies privately report similar problems.

Faced with rising compliance costs, what can companies do? First, they can integrate community involvement work with supply chain management, as Ikea is seeking to do in Uttar Pradesh (see this page). Child labour, to take one of the compliance targets, did not arise when western businesses moved their manufacturing to developing countries. It was already an established feature of these societies and cultures. To keep costs to a sensible level, companies need to define clearly where their responsibilities end and those of society begin. Promising the world and then finding you cannot deliver risks making a difficult situation worse.

That said, it makes sense to focus on issues as well as process. As in non-financial reporting, the temptation is for inspection and data collection to become a substitute for action. Auditing and compliance are essential, but only as elements in a mix. Senior management and communications teams have to be educated that meeting compliance targets is necessary, but not sufficient.

Training suppliers, employees and, above all, buyers is likely to have more impact in the long term.

For their part, socially responsible investment analysts need to devise methods of evaluating supply chain management that do not merely reward box-tickers.

Business must engage with non-governmental organizations. Their assistance is essential. Last, but not least, the report to the World Bank (see page one) is right: governments have to become involved. However, they will not do so unless pressed. Government participation would signal to laggard companies and suppliers that they need to take action. At the least, it might ensure existing regulations are enforced.

Fortunately there is a model for how the different actors can be brought together: the Extractive Industries Transparency Initiative, now going from strength to strength.


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